The Retirement Research Foundation recently reported that a person reaching age 65 today can expect to live well into his or her 80s.

In response to rising life-expectancy rates, the IRS has updated its rules for required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement accounts. Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10 percent federal tax penalty. The new rules calculate RMDs using the latest life-expectancy tables and give plan owners the potential to withdraw less each year, reduce current income taxes, and stretch tax-deferred savings.

Specific Changes Affecting Distribution Planning

Although the IRS initially proposed a simplification of RMD rules in early 2001, the latest rules, finalized in April 2002, go even further to potentially benefit taxpayers. Changes include:

Allowing couples with a considerable age disparity or young beneficiaries to use RMD calculations that take into account multiple life expectancies; eliminating certain variables to simplify RMD calculations; clarifying the rules for dividing accounts among multiple beneficiaries; changing the deadline for designating a beneficiary; requiring IRA trustees to notify owners of their RMD amount, beginning in 2003, and to notify the IRS about RMDs that are due each year, beginning in 2004.

New Distribution Planning Laws Require Knowledge

Despite favorable changes, the laws governing RMDs are still fairly complex, and the penalties for noncompliance can be severe - up to 50 percent of funds that should have been withdrawn but weren’t. Keeping pace with IRS rules and steering clear of penalties may require considerable effort, but knowing the facts could also mean significant savings. Be sure to consult a tax professional about your situation.